 "Nusli Wadia, Chairman, Wadia Group")
The process followed in the removal of an independent director from the board of a company has come under review. According to sources, discussions are on between market regulator Securities and Exchange Board of India (Sebi) and companies watchdog Ministry of Corporate Affairs (MCA) whether the removal process should be brought at par with the reappointment process of an independent director—which is by way of a special resolution.
Under Section 152 of the Companies Act, an independent director can be removed from the board of company through an ordinary resolution. While the appointment of an independent director, too, is by way of an ordinary resolution, the re-appointment has to be done through a special resolution. An ordinary resolution requires majority approval (over 50 per cent) of all the shareholders’ votes, while a special resolution needs 75 per cent of the votes in favour of the resolution.
The rethink has been triggered by the removal of Nulsi Wadia as an independent director from Tata Chemicals, Tata Steel and Tata Motors for backing Cyrus Mistry, the ousted chairman Tata Sons’ in its brawl with Ratan Tata.
“It is felt that the present provisions make the removal process less stringent than the appointment process. Therefore, since a special resolution is required for re-appointment of independent director, the same principle should be applied for his removal also, ie, special resolution may be made necessary,” Sebi is said to have written to the MCA in a recent communication.
A petition has been filed before the Bombay High Court by Janak Mathuradas, a shareholder in the Tata group companies. The petition, to which Sebi has been a party, mandates special resolution for removal of independent directors.
In an interim order, the court had put a stay on appointment of independent director on the Tata group companies in place of Wadia.
The court is likely to hear the matter on February 6.
Shriram Subramanian, managing director at proxy advisory firm InGovern Research, says the process needs to be tightened as under the current process removal of an independent director is effortless.
“The Companies Act says that the independent directors should act in the interest of the company, not the dominant shareholders. But the dilemma is that they can be removed on whims of the promoters,” he says.
R S Loona, senior partner at Dhaval Vussonji Alliance, says companies need to put in place proper evaluation process in removing or re-appointing independent directors.
“The board needs to follow an exercise which involves the evaluation of all the directors. It should not be the case that the board gives an excellent evaluation report in all the years and suddenly decides to remove the director. So, there has to be a sanctity test.”
Interestingly, earlier this month, the market regulator had issued a detailed noted on ‘board evaluation’ stating that the concept in India is at a “nascent stage”. In the note, Sebi had suggested setting up of a nomination and remuneration committee to determine “whether to extend or continue the term of appointment of the independent director, on the basis of the report of performance evaluation of independent directors”.
The regulator has also made key suggestions for conducting the evaluation process of the board.
